Cryptocurrency – Attorney Evan Brown

March 21, 2024 Blockchain, Contracts, Cryptocurrency

Bitcoin miner denied injunction against colocation service provider accused of removing rigs

Plaintiff Bitcoin miner sued defendant colocation hosting provider for breach of contract, conversion, and trespass to chattels under Washington law. After filing suit, plaintiff filed a motion for temporary restraining order against defendant, seeking to require defendant to restore plaintiff’s access to the more than 1,000 mining rigs that defendant allegedly removed from its hosting facility. The court denied the motion, finding that plaintiff had established only possible economic injury, not the kind of irreparable harm required for the issuance of a temporary restraining order.

The underlying agreement

In July 2021, the parties entered into an agreement whereby plaintiff would collocate 1,610 cryptocurrency mining rigs at defendant’s facility. Plaintiff had obtained a loan to purchase the rigs for over $6 million. Defendant was to operate the rigs at a high hash rate to efficiently mine Bitcoin, with defendant earning a portion of the mined BTC.

After plaintiff defaulted on its loan, however, in early 2023, defendant allegedly reduced the available power to the rigs, despite plaintiff having cured the delinquency. Plaintiff claimed this reduced power likewise reduced the amount of Bitcoin that imined, and claims that defendant reallocated resources to other miners in its facility from whom it could earn more money.

The discord between the parties continued through late 2023 and early 2024, with 402 rigs being removed, and then defendant’s eventual termination of the agreement. The parties then began disputing over the removal of the remaining rigs and alleged unpaid fees by plaintiff. In early March 2024, plaintiff attempted to retake possession of its rigs, only to allegedly find defendant’s facility empty and abandoned. This lawsuit followed.

No irreparable harm

The court observed that under applicable law, a party seeking injunctive relief must proffer evidence sufficient to establish a likelihood of irreparable harm and mere speculation of irreparable harm does not suffice. Moreover, the court noted, irreparable harm is traditionally defined as harm for which there is no adequate legal remedy, such as an award of damages. Further, the court stated that it is well established that economic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.

In this situation, the court found there to be no problem of irreparable harm to plaintiff. The court distinguished this case from the case of EZ Blockchain LLC v. Blaise Energy Power, Inc., 589 F. Supp. 3d 1102 (D.N.D. 2022), in which a court granted a temporary restraining order against a datacenter provider who had threatened to sell its customer’s rigs. In that case, the court found irreparable harm based on the fact that the miners were sophisticated technology and could not be easily replaced.

The court in this case found there was no evidence defendant was going to sell off plaintiff’s equipment. It was similarly unpersuaded that the upcoming Bitcoin halving (anticipated in April 2024) created extra urgency for plaintiffs to have access to their rigs prior to such time, after which mining Bitcoin will be less profitable. Instead, the court found that any losses could be compensated via money damages. And since plaintiff had not provided any evidence to support the idea it would be forced out of business in these circumstances, the court found it appropriate to deny plaintiff’s motion for a temporary restraining order.

Block Mining, Inc. v. Hosting Source, LLC, 2024 WL 1156479 (W.D. Washington, March 18, 2024)

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January 17, 2023 Anonymity, Cryptocurrency

Cryptocurrency scam victim can seek to identify Coinbase, Binance and Gemini users

A federal court in Wisconsin allowed a cryptocurrency scam victim to try to find out who stole his cryptocurrency. It found that good cause existed to allow the plaintiff-victim to send subpoenas to Coinbase, Binance and Gemini.

cryptocurrency scam victim

The Federal Rules of Civil Procedure state that a party cannot seek discovery “from any source before the parties have conferred as required by Rule 26(f).” So plaintiff was required to get authorization from the court before seeking information from the various cryptocurrency exchange platforms onto which he believed his assets had been placed. He filed a motion requesting such authorization.

The judge first observed that various trial courts within the same federal circuit (this case arose in Wisconsin federal court, which is in the Seventh Circuit) have applied different tests when deciding whether “expedited discovery” is appropriate. One such test requires, among other things, that the party seeking discovery show that it will suffer irreparable harm if the request is not granted. The other test – the good cause standard – allows expedited discovery “when the need for [such discovery], in consideration with the administration of justice, outweighs the prejudice to the responding party.”

In this case, the court applied the good cause standard. But the court did not allow plaintiff to send subpoenas concerning all of the information he had asserted should be discoverable. For example, plaintiff asked the court for permission to seek the Doe defendant’s social security number, as well as transaction logs and correspondence. The court found such requests “go far beyond seeking the defendants’ identifying information” and would instead be the types of discovery requests the court might expect plaintiff to make once the defendants have been identified and plaintiff is seeking discovery as to his substantive allegations. Instead, the court permitted expedited discovery for the sole purpose of obtaining information to identify the John Doe defendants. This information included only the name, street address, telephone number and e-mail address of each John Doe.

The court further ordered that Coinbase, Binance and Gemini had to provide a copy of the subpoena to each John Doe and any other affected user as soon as possible after service of the subpoena. The court’s order also provided that each of the platforms and any affected user must have 14 days from the date of service of the subpoena to object to the subpoena under Federal Rule of Civil Procedure 45(d)(2)(B). The platforms were ordered not to disclose any John Doe’s identifying information, or such information for any other affected user, during that fourteen-day period (unless or until the court may otherwise order). The platforms were also ordered to preserve any material responsive to the subpoena for a period of no less than 90 days to allow the plaintiff to file a motion to compel.

Wuluvarana v. Does 1-3, 2023 WL 183874 (E.D. Wisconsin, January 14, 2023)

Evan Brown is a technology and intellectual property attorney in Chicago. Follow him on Twitter at @internetcases.

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January 4, 2022 Contracts, Cryptocurrency, Fraud/Misrepresentation

Exploiting blockchain software defect supports unjust enrichment claim

blockchain unjust enrichment
Most court cases involving blockchain have to do with securities regulation or some other business aspect of what the parties are doing. The case of Shin v. ICON Foundation, however, deals with the technology side of blockchain. The U.S. District Court for the Northern District of California recently issued an opinion having to do with how the law should handle a person who exploits a software flaw to quickly (and, as other members of the community claim, unfairly) generate tokens.

Exploiting software flaw to generate tokens

Mark Shin was a member of the ICON Community – a group that includes users who create and transact in the ICX cryptocurrency. The ICON Network hosts the delegated proof of stake blockchain protocol. The process by which delegates are selected for the environment’s governance involves ICX users “staking” tokens. As an incentive to participate in the process, ICX holders receive rewards that can be redeemed for more ICX. The system does not give rewards, however, when a user “unstakes” his or her tokens.

When a new version of the ICON Network software was released, Shin discovered that he was immediately awarded one ICX token each time he would unstake a token. Exploiting this software defect, he staked and unstaked tokens until he generated new ICX valued at the time at approximately $9 million.

Bring in the lawyers

Other members of the community did not take kindly to Shin’s conduct, and took steps to mitigate the effect. Shin filed suit for conversion and trespass to chattel. And the members of the cryptocurrency community filed a counterclaim, asserting a number of theories against Shin, including a claim for unjust enrichment. Shin moved to dismiss the unjust enrichment claim, arguing that the community’s claim failed to state a claim upon which relief could be granted. In general, unjust enrichment occurs when a person has been unjustly conferred a benefit, including through fraud or mistake. Under California law (which applied in this case), the elements of unjust enrichment are (1) receipt of a benefit, and (2) unjust retention of the benefit at the expense of another.

Moving toward trial

In this case, the court disagreed with Shin’s arguments. It held that the members of the community had sufficiently pled a claim for unjust enrichment. It’s important to note that this opinion does not mean that Shin is liable for unjust enrichment – it only means that the facts as alleged, if they are proven true, support a viable legal claim. In other words, the opinion confirms that the law recognizes that Shin’s alleged conduct would be unjust enrichment. We will have to see whether Shin is actually found liable for unjust enrichment, either at the summary judgment stage or at trial.

Examining the elements of unjust enrichment, the court found that the alleged benefit to Shin was clear, and that the community members had adequately pled that Shin unjustly retained this benefit. The allegations supported the theory that Shin materially diluted the value of the tokens held by other members of the community, and that he “arrogated value to himself from the other members.” According to the members of the community, if Shin had not engaged in the alleged conduct, the present-day value of ICX would be even higher. (It will be interesting to see how that will be proven – perhaps one more knowledgeable than this author in crypto can weigh in.)

Shin v. ICON Foundation, 2021 WL 6117508 (N.D. Cal., December 27, 2021)

January 7, 2014 Cryptocurrency, Right of Publicity, Trademarks

The trademark and right of publicity woes of having a cryptocurrency named after you

Not too surprisingly, Kanye West’s lawyers have demanded the developers of the Coinye West cryptocurrency not use his name. The somewhat obnoxious letter shows that Kanye’s lawyers are asserting, among other things, trademark infringement and right of publicity misappropriation.

Russell Brandom at the Verge observes that “[o]nce the code is public, the original coders will be unable to prevent its use, forcing West’s legal team to prosecute every instance of Coinye individually.”

That observation raises a couple of interesting points. The first one is more of a clarification — once the code is in the wild, we should assume Kanye would only care to stop the use of his name, and would not seek (nor have any basis upon which) to stop anyone from using the code.

Stopping users of a cryptocurrency from using the name of that cryptocurrency could be a bit tough. Kanye’s lawyer threatens to “purse all legal remedies against any business that accepts the purported COINYE WEST currency.”

Infringement and misappropriation both depend on a use of the offending term in a commercial way. But users of the decentralized system, and the vendors who accept that currency, are not providers of any goods or services onto which Kanye’s identity will be attached. If one is merely using the currency as a tool, it’s hard to see how that’s any different from implicating the rights of the historical figures who appear on paper currency. So might it all be about the Benjamins? Maybe not at all.

November 7, 2013 Cryptocurrency, Uncategorized

Tomcar sales using Bitcoin reveal some new norms

The Australian off-road utility vehicle manufacturer Tomcar has begun accepting Bitcoin as a form of payment for its direct sales to customers. This example of Bitcoin’s expansion into the marketplace sends a few interesting messages, among them:

Sellers and buyers will be motivated to use the cryptocurrency for reasons other than anonymity: Tomcar’s stated reason for liking Bitcoin is to avoid credit card transaction fees and unfavorable international currency exchange rates.
Bitcoin plays a role in the supply chain, not just in transactions with the end user. Tomcar is paying some of its suppliers using Bitcoin. The Winklevoss twins say Bitcoin could become the currency for an entire country.
Payment gateway CoinJar (which Tomcar uses) is an interesting specimen. It’s not just the Brothers Winklevii who are investing in the Bitcoin marketplace.
The Silk Road shutdown was a good thing. Cryptocurrency lends itself well to a seedy marketplace. And those seeds, watered with unscrupulousness, will bear fruit of bad reputation. Tomcar’s founder hails Silk Road’s demise, since a lack of association with the unlawful will do the currency some PR good.

One can’t help but wonder whether there are some opportunities to reinforce some stereotypes when thinking about Tomcar and the people who would buy them. The off-road utility of the vehicles would come in handy in the post-apocalyptic world occasioned by the collapse of modern governments – the very entities running a monetary system that the Bitcoin enthusiast gladly wishes to circumvent.